CLUE Restrictions: California Limits Use Of Loss History Data

Already on the defensive about the use of credit scores for underwriting, property/casualty insurers now face another assault on one of their prime data tools in the nation's largest market for homeowners insurance.In late April, California Insurance Commissioner John Garamendi all but banned carriers' use of the main data source to underwrite and rate homeowners insurance policy. For 11 years, the Comprehensive Loss Underwriting Exchange (CLUE) has tracked claims on properties and property owners supplied by carriers of the nation's homeowners insurance policies.

Carriers use CLUE reports to determine if applicants for homeowners insurance have owned any property over the past five years and whether any claims have been filed against the property for which the applicant is seeking coverage. Garamendi's advisory all but prohibits insurers from using that data for any adverse underwriting decision.

Industry reaction

The insurance industry immediately responded by claiming that Garemendi's bulletin was actually a regulation and therefore needed to be vetted through the usual public process.

Furthermore, industry groups say the decision could lead to a drying up of the homeowners market in the state and long periods of time for consumers to get property insurance.

Garamendi's move to dilute the effectiveness of CLUE and other such databases is part of what he terms a Homeowners Bill of Rights. It also includes an effort to outlaw the use of credit scores until the industry can come up with proof that the practice doesn't impose a disparate impact on the minorities and the poor, along with a ban on so-called "use-it-and-lose-it" practices in which consumers are subject to cancellation when they file a claim.

Industry sources say they're surprised that CLUE has not been targeted in more states.

Credit scoring, on the other hand, is on the legislative docket in about 40 states, but many of those bodies have passed measures based on the model developed by the National Conference of Insurance Legislators, Albany, N.Y.

But the crux of the debate for both issues centers on whether credit scoring or CLUE data can accurately predict future claims losses.

CLUE's value

The advisory issued by the California Dept. of Insurance on April 24 states that such data "do not distinguish between losses or claims that do bear a substantial relationship to an insured's loss exposure and those that do not."

The advisory itself does not mention CLUE, a proprietary product of Alpharetta, Ga.-based Choicepoint Inc. but instead refers to "data provided by insurance support organizations." But CLUE-along with A-PLUS-has been the industry standards for years.

The advisory further states that if an industry data report unearths an unfavorable claims record, "if necessary, further information must be gathered by the insurer to determine if an increased exposure to further loss exists before the loss information can be used as ground for an adverse underwriting decision."

Sam Sorich, vice president of the the National Association of Independent Insurers, Des Plaines, Ill., says the advisory's directive to use only those losses that have a substantial relationship to risk of future loss leaves carriers in a quandary as to how they can proceed under the new guidelines.

"From what I am hearing from my member companies, there is a lot of confusion as to what the impact of this notice really is," Sorich says. "There are some generalities about having to evaluate the loss and inspect the loss.

"Literally read, it seems that to rely on that loss information in making an adverse underwriting decision, you almost have to go out there and inspect every property, and have an interview with the claimant to ensure that that loss information is still substantially related to the risk of future loss."

Sorich likens the use of CLUE data for homeowners insurance to that of motor vehicle bureau data for auto underwriting, which has never been controversial.

Ruling's impact

Some CLUE data reports consider mere inquiries regarding coverage, coverage discussions or hypothetical discussions in the same vein as claims for real losses, which the advisory takes pains to prohibit.

Under the new rule, insurers no longer can consider any losses that "have been fully remedied or otherwise resolved" to justify an adverse underwriting and rating criteria.

Sorich expressed concern that insurers are now no longer able to recognize claims frequency as substantially related to future loss. "Frequency can represent different things such as a homeowner not properly maintaining his home or that there is an inherent condition in the home that poses a substantial hazard or that some policyholders have a tendency to make multiple claims for small items," he says.

But overall the industry complains that in California at least, carriers must use "specific, objective" factors, but apply them subjectively on each policy they issue.

Steve Tuckey is the New York-based editor for Insurance Chronicle, a Thomson Media publication.